DAVE CALHOUN is no stranger to crises. A former acolyte of Jack Welch, he was picked to run GE’s aircraft-engines and avionics division months before the 9/11 terrorist attacks of 2001 clobbered the industry. In the past year or so, as boss of Boeing, he has faced an even stiffer challenge. The company is only slowly emerging from a 21-month grounding of its bestselling 737 MAX passenger jet in the wake of two fatal crashes. Mr Calhoun must mend a cracked corporate culture that contributed to those disasters. If that were not enough, covid-19 has put air travel into a tailspin—and with it airlines’ plane purchases. On January 27th the firm announced a fifth straight quarterly loss. A record annual net profit of $10.5bn in 2018 turned into a record $11.9bn net loss in 2020. Boeing delivered 157 passenger and cargo aeroplanes last year, 80% less than in 2018 and a third as many as Airbus, the European half of the planemaking duopoly. One analyst heaped mock-praise on Boeing for beating its previous tally—from 1973.
Mr Calhoun now thinks recovery is on the radar. There are certainly blips of good news. A global roll-out of covid-19 vaccines brings hope for stranded airlines. The MAX is back in the air in America and will be soon in Europe. Deliveries of the plane are resuming. And Boeing got away with a slap on the wrist from regulators over lax safety practices. But the firm, which has destroyed $140bn in shareholder value over the past two years, is not in the clear. Without America’s doting government, it may never be.
Boeing began to lose its way long before the MAX disasters. After a merger with McDonnell Douglas in 1997, engineering excellence lost ground to meeting Wall Street targets. Cosy relations with America’s Federal Aviation Administration (FAA) allowed the firm to self-certify many of its processes; one Boeing employee boasted of “Jedi mind-tricking regulators”. When the MAX disaster struck, the firm botched its response. The strategy under Dennis Muilenburg, Mr Calhoun’s predecessor, was to talk things up, keep suppliers humming along and pump out more MAXes, never mind that customers were cancelling orders. In late 2019, as unwanted planes began to pile up in Boeing’s corporate car parks, Mr Muilenburg was tossed from the cockpit and Mr Calhoun, ten years a board member, was handed the controls.
A combination of misfortune and lousy leadership would have bankrupted many a firm. But Boeing is no ordinary company. Before the pandemic about one in 130 American workers was employed either by Boeing, with a domestic payroll of 143,000, or by one of its 12,000 local suppliers, with another 1m workers. Despite lay-offs across the aerospace industry in the past year, it remains a source of well-paid jobs—and, thanks to its weapons and space-rocket business, a strategic darling of politicians.
Official desire to keep it aloft was obvious to anyone studying its recent $2.5bn settlement with the Department of Justice (DoJ) over the MAX mess. The actual fine was just $244m; most of the remainder was compensation previously allotted to airlines whose MAX jets had been grounded. The company was criminally charged but prosecution was deferred, sparing it the worst consequences. And as one arm of the government sought to punish Boeing, another offered it a backdoor bail-out. The Federal Reserve’s flooding of capital markets with liquidity in response to the pandemic was designed largely with firms like that in mind. As a result, Boeing was able to borrow $25bn from private investors, avoiding the strings attached to a direct rescue.
Even so, it remains financially fragile. Its gross debt has more than doubled to $63bn over the past year. It is burning cash faster than early jumbo jets drank kerosene. Its free cashflow (after factoring in the cost of operations and maintaining capital assets) was -$20bn in 2020. Operational fragility, meanwhile, extends beyond the MAX. Last quarter Boeing shipped just four 787 Dreamliners, after wrinkles were discovered on the wide-body’s fuselage. Compensation claims for delayed deliveries may result in a charge of up to $3bn. Boeing is taking a $6.5bn charge against another wide-body model, the 777X, delivery of which has been pushed back three years because of uncertain demand for air travel.
With civil aviation stalling, the defence-and-space division has become Boeing’s main engine. It sold $26bn-worth of gear last year, against $16bn for passenger and cargo jets. National defence budgets are rising; America’s is up by over $90bn since 2016. But even here Boeing is sputtering. Owing to a software error its Starliner space capsule missed its target, the iss, on its first launch in 2019. This month nasa had to shut down a new Boeing rocket engine a minute into an eight-minute test after a technical glitch.
Cashless in Chicago
All these problems need fixing at a time of unprecedented strain on the balance-sheet. They are forcing Mr Calhoun to delay investing for the future. Boeing’s net research-and-development spending was almost a quarter lower in 2020 than in the previous year. To conserve cash, it is closing a big research centre in Seattle, where innovations such as the 787’s lightweight carbon-composite fuselage were dreamed up. Boeing’s capital expenditure slumped from $1.7bn in 2019 to $1.3bn in 2020. Despite pandemic-related cuts, that of Airbus is closer to $2bn, leaving it with more resources to develop climate-friendlier aircraft.
To have a fighting chance against Airbus, which bagged 1,200 more orders than Boeing in 2015-19, Mr Calhoun must restore cashflow. That will require regaining the trust of customers, many of which are foreign airlines that will look askance at any sign that Boeing lacks credibility—or of its continuing regulatory capture of the FAA or DoJ. It needs to persuade them to love the MAX again—a task is made harder by fresh allegations that the MAX’s problems may extend beyond its flight-control software. If all else fails, Boeing can always count on its doting government to offer a parachute. Whether Mr Calhoun gets one is another matter.
Source: Business - economist.com
